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Britain facing decade of economic pain: forecasters

January 18, 2010 | AFP

LONDON — Britain faces the prospect of a decade of economic pain, after binging on cheap debt, and its recovery will rely on trading more with Asian tigers like China, forecasters warned on Monday.

The economy, expected to have escaped recession in the last quarter of 2009, faces a "challenging" 2010, according to the Independent Treasury Economic Model (ITEM) Club economic forecasting group of auditors Ernst and Young.

"The UK economy has moved out of a decade of debt and into a decade of painful readjustment," the ITEM Club said in a key report published on Monday.

"After years of relying on domestic spending and borrowing the economy now needs to rebalance towards saving and exporting, or risk stagnating."

British gross domestic product (GDP) will meanwhile "struggle" to reach 1.0 percent this year.

"The UK is facing another challenging year," added chief economic adviser Peter Spencer.

"We are no longer in a position to borrow -- the massive debts that we racked up in the last decade now need to be repaid.

"The consumer is completely cashed out -- with consumer spending likely to increase by just 0.4 percent this year."

However, Britain will fare better if the country trades more with Asian powerhouse economies like China, he added.

"It is vital the UK rejuvenates its overseas investment model and starts selling into countries such as China, where we have an exceptionally low market share compared to our leading competitors.

"The UK's recovery is reliant on a roaring trade with the tiger economies," Spencer added.

Official data due on January 26 is widely expected to reveal that Britain exited its longest recession on record during the fourth quarter of 2009, or three months to December.

But the ITEM Club said Monday that this was due to exceptional emergency stimulus measures -- like the new-for-old vehicle scrappage scheme that has boosted the troubled auto sector.

Another measure was British finance minister Alistair Darling's temporary cut in taxation on goods and services -- or value-added tax (VAT) -- but this expired at the start of the year.

"Once the effects of these temporary stimuli have worn off, it is difficult to see where the growth is going to come from in the short-term," Spencer added.

"ITEM forecasts that GDP will struggle to reach 1.0 percent this year, with interest rates likely to remain flat well into 2010."

Turning to the public finances, the ITEM Club also expressed concern about sky-high government borrowing.

"ITEM remains concerned about the Treasury's projections for next year, which are based upon very optimistic assumptions for both the pace of the economic recovery and for the value of tax revenues raised," it said.

Late last year, Chancellor of the Exchequer Darling forecast in his pre-budget report that state borrowing would hit a record 178 billion pounds in the current 2009/10 financial year which runs until April.

"The fiscal position remains a major uncertainty and the pre-budget report was a big disappointment, with the Chancellor failing to come up with any credible medium-term plan for restoring the public finances to health," Spencer said on Monday.

The country's longest recession on record has slashed taxation revenues and ramped up government spending on unemployment benefits and economic stimulus measures.

The public purse was also ravaged by a series of enormously expensive bailouts in the British banking sector.

By Roland Jackson

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